Schools: What Buyers Want

A house is a collection of desirable characteristics: shelter, comfort, and location.

School quality is a locational characteristic that influences home values. Research shows us that homebuyers are not only aware of differences in school quality but also have revealed their preferences for higher quality schools by paying a premium for their home. This premium for school quality is among the most imp0rtant factors in determining home prices. (Neighborhood School Characteristics: What Signals Quality to Homebuyers? Kathy J. Hayes, Research Associate Federal Reserve Bank of Dallas and Professor of Economics Southern Methodist University, and Lori L. Taylor, Senior Economist and Policy Advisor Federal Reserve Bank of Dallas, 1996)

Buyers agree with Economists. So we know that buyers will pay more for a house in a neighborhood with a “good” school, but not all school characteristics appear to be indicators of school quality. Buyers aren’t willing to pay more for things like school expenditures or student body characteristics. Instead , researchers find evidence that the school characteristic for which homebuyers pay a premium is the same characteristic that economists associate with school quality, namely, the “marginal effect” of the school on student performance. (The Economics of Schooling: Production and Efficiency in Public Schools, Eric A. Hanushek, Journal of Economic Literature, Volume 24, Issue 3, Sep. 1986)

What are the “Marginal Effects” of Schools?

Economists who study schools talk about Educational “Production.” The concept of production is an important teaching and research tool, and applies to all kinds of industries – including education. For all industries, output depends on input: more materials, labor, automation, etc. equals more widgets produced. For schools, the inputs are things like teacher quality, school characteristics, curricula, etc. These are mostly controlled by school administrators and policy-makers (the School Board). The output of the educational process is the achievement of individual students.

The theory is that more and better schooling makes people more productive in the labor market, better able to participate in society, better consumers, etc. Economists, sociologists, and political scientists have conducted hundreds of investigations into post-schooling outcomes. In general, empirical studies confirm the correlation between higher levels of schooling and positive attributes after graduation.

Good Schools and The Good Life

Although the relationship of a good education and a good job is apparent to homebuyers, there are plenty of other “marginal effects” that have been studied. Individual academic achievement has also been linked to:

increasing the productivity of mothers working at home, and the effects of the mother’s education on the learning of young children(Arleen Leibowitz 1974)

the effect of education on political socialization and voting behavior (Richard Niemi and Barbara Sobieszek 1977)

the relationship between education and criminality (Isaac Ehrlich 1975)

the contribution of education to economic growth (Edward Denison 1974)

the effect of education on marriage and divorce (Gary Becker, Elizabeth Landes, and Robert Michael 1977)

A number of studies have shown how differences in the attractiveness of a particular school or school district come to be capitalized into the price of houses. Most of these studies look at the differences in the “provision of public services,” of which schooling is the most important one.